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Wednesday, 9 December 2009

Employee ownership of businesses

I was listening to a fascinating podcast this morning from Peter Day's In Business Programme on BBC Radio 4. He was looking at alternative structures for organisations and in particular structures where the employees own all or part of the shares of the business. These companies have consistently out-performed the FTSE 100 companies and it is not difficult to see why. The employees have a sense of ownership in the business and have a vested interest in promoting and making the business succeed. Employees feel more fulfilled and have a direct say in how the business is run. Companies who had such schemes reported all sorts of unexpected benefits. There was an example of a construction company who had prior to the launch of the employee share scheme repeatedly lost expensive machinery. After the scheme was launched they only lost 1 machine in 17 years. This was not because employees were stealing the machines but because employees were taking more care to ensure the machines were locked away.
There are two possible ways of achieving this. One is for the employees to have shares in a trust and the trust owns the company. This has the advantage in that employees are not constantly buying and selling shares. The shareholders do not have dividends issued to them. This is how the John Lewis Partnership is constituted which has been in existence since the 1950's.
The other way is by way of direct ownership. Companies often give a percentage of the shares of the business to the employees. The percentage of shares which companies choose to distribute varies. The construction company on the podcast had handed out 25% of their shares to their employees free of charge based on the number of employees. However, there would be nothing to stop a larger percentage being distributed.
The businesses which had launched schemes highlighted on the programme varied from architectural firms to cash and carry companies.
The key point made was that in these troubled times, normal shareholders are fairly detached from the companies they invest in whereas employee shareholders have a direct impact on the business. They are not short termist but are genuine looking to build long-term sustainable growth.
There couldn't be a better time to be thinking of these structures especially as it often means that you do not have to rely on bank funding or normal equity investment to build and grow your company. Of course, if the company fails, the employees have more to lose. The recent collapse of Lehman Brothers where the loss to the employees was even more exacerbated because most of the employees had been rewarded in shares serves as a timely reminder of the downside employee ownership but may be it is no bad thing for employees to share some of the risk with the proprietors of the business.